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Your Retirement Could Be More Expensive Than You Think

Healthcare expenses in retirement could be a lot more than you expect them to be, especially if the current trend continues.

Many of us have a "retirement number" -- that is, the amount of money we want to have saved in order to comfortably retire. However, your number probably doesn't account for the rapidly increasing health care costs retirees are facing. According to the latest data, your health care costs in retirement could stretch well into the six-figure range, even after Medicare, and the average is rising rapidly.

It could be bigger than you thinkAccording to recent data, health care expenses in retirement are rising, and fast. According to one recent study, a 65-year-old couple who retires now can expect to pay $266,589 for health care throughout their retirement, a 6.5% gain from a year ago.

If this trend continues, the cost of post-retirement health care could get big in the future. Not only are health care costs expected to keep rising, but people are living longer and longer lives. In fact, the same study found that a couple retiring 10 years from now at age 65 would face $320,996 in health care costs. And these numbers don't include expenses such as dental, vision, and hearing care.

Including all health care-related expenses, the totals rise to $394,954 and $463,849 for 65-year-old couples retiring now and in 10 years, respectively. Did you plan on spending that much of your retirement nest egg on health care?

The problem here is that wage and Social Security increases haven't grown nearly as quickly as health care expenses, nor are they projected to do so. A current retiree can expect 67% of his Social Security income to go toward health care costs, while someone retiring in 10 years could see 90% of her Social Security income go toward health care.

How to adjust your plansThe best way to plan for higher health care expenses is to take advantage of the savings tools available to you. For example, if you have a health savings account (HSA), you can leave the funds in your account, letting them compound tax-free, for as long as you want.

It may sound obvious, but the best way to prepare is to save more money. If you are 35 years old, in order to add $300,000 to your retirement nest egg by the time you retire at 65, you'll need to save about $150 more per month starting now, assuming your investments match the S&P's historical average rate of return. Here is a chart of how much you might need to save per month for health care costs alone, based on your current age and how much extra you want to end up with.

Current Age

$200,000 Extra for Healthcare Expenses

$300,000 Extra

$400,000 Extra

30

$63 per month

$94

$126

35

$101

$152

$202

40

$165

$247

$330

45

$277

$415

$553

50

$544

$725

$1,089

One other great investment that can keep your costs down is taking better care of your health now. According to a study from the University of Michigan, people in good health spend nearly 20% less per year than people in poor health. So, by exercising a little more and eating better now, you can save yourself thousands of dollars (not to mention a lot of discomfort) in the future.

And, if you are worried about outliving your money, one possible solution is a deferred-income annuity. You can read more about these investments here, but basically you give a company a certain amount of money now in exchange for income starting at a certain age -- say, 85 years old. Think of it as a form of "insurance" in case you happen to live longer than you think you will.

Err on the side of cautionI realize that increasing your retirement nest egg by $300,000 is no small task, and I also realize that if you've been actively planning for your retirement, you probably already assume that some of your savings would go toward health care costs, so you probably don't need an extra $300,000 to cover your expenses.

However, like everything else in life, it's better to over-prepare than to under-prepare. The point of this discussion is that your health care costs are likely to be higher than you anticipate, especially if you're young. So, if you can increase your savings a little bit or take better care of your health now, it could go a long way toward maintaining or improving your financial security throughout your retirement.

Author

Matt brought his love of teaching and investing to the Fool in 2012 in order to help people invest better. Matt specializes in writing about the best opportunities in bank stocks, REITs, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!
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